Today’s REI Classroom Lesson

Michael Blank shares tips what to do if a broker is asking for proof of funds, but you don’t have any.

REI Classroom Summary

From not sounding like a newbie to educating yourself, you have to portray that you know what you’re doing so they don’t question your experience.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Michael: Hello there. Welcome to the REI Classroom. My name is Michael Blanc. You’re in the right place if you want to learn all about apartment building investing. Today I want to talk about how to a handle situation where your broker asks you for proof of funds and, well, you don’t have any.
Mike: This show is sponsored by passiverental.com.
Michael: So I write a lot about raising money because it’s a critical skill to learn if you want to get into apartment buildings investing. And you would want to do that so that you can replace your income with real estate in the next three to five years. So raising money is critical because most people don’t have a ton of their own money.
Now, here’s one of the challenges of raising money is sometimes you get asked by the broker for proof of funds. And the syndicator, well, the reason you’re raising money because you don’t have the funds so therefore you have no proof of your non-existent funds, and you have a real problem. And so I want to share with you kind of six tips on how to address the situation of proof of funds. And there are actually six of them. Here they are.
So tip number one is, don’t sound like a newbie, right? Now, there’s only two reasons why brokers ask for proof of funds, is one, because you sound like a newbie and they’re concerned that you won’t be able to close because you don’t know what you’re doing. And number two is because they’re following a checklist that they have either put in place themselves or the seller insists on proof of funds to weed out the riffraff. But the vast majority, 80% of the time, is because you sound like a newbie and this is a great way for the broker to make the newbie, knuckleheads, tire kickers go away, and so they ask for proof of funds.
So tip number one is, don’t sound like a newbie. I have an article on this on the website themichaelblanc.com and it’s basically how-to-not-sound-like-multifamily-newbie, all with dashes. And multifamily is written together. There’s an article there on what you can do, some script you can use so you don’t sound like a fool. And number two, of course, is to educate yourself so you’re using the right language. But that’s often times the number one reason you’re asked for proof of funds is because you sound like a newbie.
So let’s say you don’t sound like a newbie but you still get asked for proof of funds, what would you do then? You follow tip number two, you basically push back. You say, “Look, Mr. Broker, I understand your concern about our ability to close but I have a team in place, I have investors in there, we’re syndicating this deal, we don’t have the money lying around. It’ll be in a bank account a week before closing. So I can’t actually give you a proof of funds. But how about this? Why don’t we get together for a lunch meeting and if at the end of it you don’t feel comfortable moving forward, we’ll meet to contract, a letter of intent, or whatever the case may be, we’ll part as friends.”
Now you’re pushing back and you’re saying, you’re calling for a meeting to get it because of the comfort level thing. If after hearing your story about all the things you’ve done, the team you’ve built, and the deals you’re looking at, and investors you’ve recruited or whatever, they may go, “Look . . . ” and this happens very . . . especially if you meet them in person. They kind of say, “I get it now. You’re really serious about this stuff and I can sell you to my seller.” It’s a great way to push back, explain the situation and suggest an in person meeting to make that broker comfortable.
All right. So tip number three if that didn’t work, then I would make the proof of funds contingent on a letter, on the signing of a letter of intent. So make it contingent of within 48 whatever, 72 hours. I will supply a proof of funds, and that does two things. Number one, it buys you time. But number three, when you get a proof of funds, we’ll talk about in the next tip, if you actually have to get a proof funds, you don’t want to run to get proof of funds for something that’s not real, and real is a signed document, right? And I’ll explain to you the process of getting a proof of funds but it’s onerous on behalf of the person you’re getting it from and you want to use those lightly.
So if you must agree to a proof of funds and make it contingent on signing something, an LOY or maybe even better, a contract, “Within 48 hours of signing the contract, I will get you the proof of funds.” So the farther back you can push it the better. The minimum is signing of an LOY. I wouldn’t even say anything before then. And that’s not with the LOY, it’s within the LOY because otherwise, I’m not going to my investors for no reason whatsoever, not even knowing if we have some agreement here. So I would totally push back in that way.
So tip number four, if you’ve done those things and you actually now need to get something. So one thing you can do is you can demonstrate intent, not quite by providing a proof of funds, and I’ll talk about what that is. So instead of providing an actual proof of funds, what you do is, let’s say you have verbal commitments from your investors, what you do is you basically have them sign a very small one page letter of intent to invest.
It says, “Hey, Michael’s a good guy. I have $100,000 I want to invest with him and if the deal’s right, I will invest with him.” Kind of like give intent. And you have, let’s say you’re raising $250,000 and you have 5 people at $50,000, then you have each of those investors sign this document. And you can include that with your letter of intent that you’re submitting as an offer. And this makes your offer more credible, and it would actually, possibly satisfy that requirement.
Now, if that does not satisfy the requirement, you need to actually get . . . you’ve done all these things and it just simply does not satisfy. And you really want to get in this deal and you haven’t walked from this guy because of being a pain in the butt. If you actually must get a proof of funds, here’s how you do it.
Get it from one of your investors or another high net worth individual. Now what you’re looking for is this. Here’s what a proof of funds is, it’s either an excerpt of an account statement, a brokerage account or bank account with the account number crossed out. Or it could be, even better, it could be a one page letter from the financial institution of this individual that says, “So and so has $400,000 in management with us. Please call me with any questions.” And it doesn’t cost them anything. It’s very easy to produce, and you can actually create the template for them. And it’s just very easy to do.
And the person number one, to provide you with proof of funds doesn’t actually have to invest with you at all. It could simply be a friend of a friend who wants to help you with this, basically, this letter, and it does not obligate him to use the money or invest with you at all. And this kind of makes the whole proof funds thing kind of a meaningless exercise because you provided proof of funds and if it’s not an LLC you’re buying in, then it’s kind of sort of useless, right? But first of all, you don’t even have the entity created that you’re buying a building with. So you can’t provide a proof for the entity and 99% of the time you’re not going to be asked for that.
So basically what you’re providing is you’re showing someone that you know someone with money, that’s how meaningless the proof of funds exercise is which is why I kind of . . . I belittle it on the one hand. But on the other hand, sometimes, you’ve got to jump through the broker’s hoops so that’s what we’re doing here. So that you basically, tip number five is get it from a high net worth individual that you know who wants to help you.
That’s all I have for today’s session but if you want more information about raising money, please check out my articles here on FlipNerd, as well as my site themichaelblanc.com. I have a free eBook you can download on raising money, and I have other articles, and podcasts, and videos all about apartment building investing, but a lot of it is on raising money.
So thanks very much for your attention and I’ll catch you on the next episode of the REI Classroom. All right, take care.
Mike: Passiverental.com is your source for turnkey, done for you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
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